SE Property Holdings, LLC v. StewartSE Property Holdings, LLC v. Stewart
I. Introduction
This adversary proceeding is before the Court for decision after a three-day trial. Plaintiff, SE Property Holdings, LLC (“SEPH“) commenced this adversary proceeding seeking to bar Debtor Terry Stewart (“Terry“) a discharge under
After considering the arguments of counsel, the documentary and testimonial evidence and weighing the credibility of the witnesses, in accordance with
II. Jurisdiction
This Court has jurisdiction over this matter pursuant to
Many, but not all, of the facts upon which this trial was based are facts already determined by this Court in its Summary Judgment Order and/or were stipulated to by the Parties in the Final Pretrial Order [Doc. 228]. Additional facts upon which this Opinion are based are contained in the body of this Opinion. The facts stipulated to in the Final Pretrial Order are as follows:
I. The Alleged Fraudulent Transfers and Concealment
A. The “Oklamiss Transfer”
1. Debtors2 created Oklamiss Investments, LLC (“Oklamiss“) on September 27, 1999.
2. From the formation of Oklamiss until the effective date of the purported Oklamiss Transfer, Debtors each owned 50% of the membership interests in Oklamiss.
3. Amongst other assets, Oklamiss owns 99% of the membership interests in Raven Resources, LLC (“Raven Resources“), while David holds the remaining 1%.
4. Debtors’ ownership of Oklamiss contributed substantially to their net worth. In the May 19, 2011, financial statement, Debtors reported that Oklamiss’ real estate was worth more than $4.2 million. The financial statement also reflected secured debt on those real estate assets of more than $5.5 million. Debtors further valued Raven Resources at $20 million. In this financial statement, Debtors reported a total net worth of $19,358,491.
5. Debtors purported to transfer 98% of their interest in Oklamiss to their children,
6. Each of the Debtors, David Stewart and Terry Stewart, executed the transfer documents.
7. The Stewart Children did not pay any consideration for the transfer of the interests in Oklamiss.
8. The face of the document reflecting the Oklamiss Transfer is dated October 31, 2011, with the effective date of January 1, 2012.
9. Debtors’ December 31, 2012, financial statement shows that they owned a 100% membership interest in Oklamiss.
10. The 2013 tax returns for Oklamiss continued to show that Debtors owned 100% of the interest in Oklamiss.
11. Raven Resources’ former in-house counsel (Linda McGuire), former in-house accountant (Dan Neale), and former outside accountant (Dennis Lakely) testified that they did not learn of the Oklamiss Transfer until late 2013 or early 2014.
12. Debtors’ daughter, Jena Stewart Rush – a purported recipient of substantial interests – was not aware of the alleged Oklamiss Transfer until 2013.
13. Although David contends that the Oklamiss Transfer was a gift, Debtors did not file a gift tax return.
14. David maintained complete control over Oklamiss even after the alleged transfer. The transfer document stated that “David Stewart shall remain Managing Member (of Oklamiss) until he resigns or 12/31/2023, whichever occurs first.”
16. Debtors continued to receive all distributions from Oklamiss.
17. The Debtors and the Stewart Children signed documents agreeing that “all losses and profits attributable to Oklamiss... will be credited to [Debtors‘]... tax return[s].”
18. The Oklamiss Transfer was reflected in a decrease in the Debtors’ net worth in their financial statements. Their May 19, 2011, financial statement showed a net worth of $19,358,491. In the financial statement dated December 31, 2013, in which Debtors disclosed the Oklamiss Transfer, Debtors reported a net worth of $312,446.
19. Two loans from SEPH to David matured on December 3, 2009, and December 22, 2011. These two loans had an outstanding balance in excess of $3.7 million.
20. Debtors were guarantors on loans to Neverve, LLC (“Neverve“) and ZLM Acquisitions, L.L.C. (“ZLM“) with balances in excess of $26 million.
21. In 2012 and 2013, SEPH initiated multiple actions against Debtors and entities for which Debtors were guarantors, including SE Property Holdings, LLC v. David A. Stewart, et al., Case No. 1:12-cv-00537-CB-M (S.D. Ala.) (filed Aug. 24, 2012); SE Property Holdings, LLC v. David A. Stewart, Case No. 1:13-cv-00609-KD-C (S.D. Ala.) (filed Dec. 12, 2013); and SE Properties Holdings, LLC v. ZLM Acquisitions, L.L.C. et al., Case No. 1:13-cv-00610-CG-N (S.D. Ala.) (filed Dec. 13, 2013).
22. SEPH obtained summary judgment against Debtors in relation to the guarantees on the Neverve loans on May 19, 2014.
23. In the spring of 2014, David suggested to his mother, Ruth Carroll, that she form the Red Britt Irrevocable Trust (“Red Britt Trust“) to hold approximately $65,000.00 for unpaid royalties (the “Royalty Debt“) purportedly due to her from Raven Resources.
24. David suggested the creation of the Trust to outside counsel for Debtors and the entities they controlled (email from David Stewart asking outside counsel “[h]ow much and how long would it take set up an irrevocable trust [?]“).
25. Ruth Carroll was not present for any of the discussions about creating the Red Britt Trust.
26. Ruth Carroll testified that she “didn‘t feel [she] was owed” the Royalty Debt which purportedly was the consideration for the her being the Settlor of the Red Britt Trust.
27. When Ruth Carroll stopped receiving royalty checks in 2008, she did not inquire about the status of the royalties or attempt to collect any amounts due.
28. At the direction of David, Ruth Carroll executed documents creating the Red Britt Trust.
29. Debtors’ daughter, Jena Stewart, was the Trustee, David the primary beneficiary of the Red Britt Trust and Terry Stewart and the Stewart Children were secondary beneficiaries.
30. The Red Britt Trust had an effective date of March 19, 2014, but was not signed until July 23, 2014.
31. Along with the Red Britt Trust paperwork, Ruth Carroll, at the direction of David and in-house counsel, assigned the Royalty Debt to the newly-created NOG, LLC (“NOG“) in exchange for membership interests in NOG.
33. David executed assignments on behalf of Raven Resources to NOG on April 1, 2014; however, those assignments were not recorded with any County Clerk until late June and early July of 2014.
34. David selected the interests that were transferred from Raven Resources to NOG.
35. The Walking Woman Well, one of the properties conveyed in the Raven Resources/NOG Transfer, was a “good well,” and the value of the assets conveyed from Raven Resources to NOG “went up considerably” when the Walking Woman Well came on line and started producing after the transfer.
36. After the NOG Transfer, David, on behalf of NOG, executed an assignment of the ownership interests of NOG to be transferred to the Red Britt Trust.
37. David continued to act as manager for NOG after the NOG Transfer.
38. While Jena Rush, the Debtors’ daughter, was the trustee of the Red Britt Trust, David Stewart retained absolute control over the entities and assets within the Red Britt Trust. Jena Rush testified that the only decision she made with respect to the assets of the Red Britt Trust was to direct her father to use trust funds to buy football tickets for the benefit of Jena and other members of the Stewart family.
39. Jena Rush testified that she took no other actions to control and manage the assets of the Red Britt Trust, and she never reviewed any accounting or financial statements for the Red Britt Trust.
40. David maintained absolute control over the entities conveyed to the Red Britt
41. Raven Resources’ in-house counsel conceded that the purpose of the Red Britt Trust was to “protect” the property “[f]rom creditors” for the benefit of the Stewart Children.
II. The False Oaths
42. SEPH filed the Involuntary Petition on September 30, 2014 (the “Petition Date“).
43. Debtors, through their Alabama counsel, filed their initial Schedules and Statement of Financial Affairs (“SOFA“) on May 1, 2015.
44. Debtors filed their Amended Schedules and SOFA on September 29, 2015.
45. In their initial Schedules, Debtors disclosed that they owned a combined total of $5,500 in jewelry. During the Section 341 meeting of creditors, David testified that he owned a Rolex watch, which he valued at $500 in his initial Schedules and SOFA. Terry testified that she owned “a Rolex,” “a wedding ring,” “a band,” a “little baby ring ... worth a couple hundred dollars,” “a Tanzanite ring,” and “a few [other] things.”
46. Documents from jeweler B.C. Clark show that David purchased more jewelry than what Debtors disclosed in their initial Schedules or their testimony at the Section 341 hearing. Terry Stewart testified all of the jewelry that she owned was disclosed, and that certain items on the B.C. Clark inventory list were purchased for other people, including a diamond engagement ring for Terry‘s now daughter-in-law and “Jelly Beans Quartz Strips, Michele Watches” for her daughter.
47. Debtors produced photographs of the jewelry purportedly in their possession. Those photographs show that Debtors owned at least six necklaces, four watches, three pairs of earrings, three bracelets and six rings.
48. In his Amended Schedules, David disclosed that he owned $1,500 in jewelry,
49. In her Amended Schedules, Terry disclosed that she owned $7,012 in jewelry. This valuation of Terry‘s jewelry was based on Kannard Jewelers placing a $449 appraised value on a Tanzanite ring that Debtors purchased for $7,475; a value of $176 on earrings that Debtors purchased for $2,400; a value of $7 on a bracelet that Debtors purchased for $265; a value of $150 on a cross and chain that Debtors purchased for $2,300; and a value of $900 on diamond earrings that Debtors purchased for $6,250.
50. Debtors made these amendments to their Schedules after they learned that SEPH had issued the subpoena to B.C. Clark (subpoena issued on August 31, 2015).
51. Terry transferred a ring to her daughter, Jena Rush, as a wedding gift more than one year prior to her filing bankruptcy. According to the Debtors’ homeowners insurance policy the ring was valued at $36,600.
52. Debtors continued to insure the ring after the transfer to Jena Rush.
53. More than one year prior to the date of bankruptcy, Terry gave Jena Rush a diamond tennis bracelet and a diamond necklace and gave her daughter-in-law a pair of earrings.
54. Raven Resources’ in-house counsel, Linda McGuire, testified that she told David that she thought Terry had undervalued her jewelry in her original Schedules, at which point Terry told McGuire that she had given some of the jewelry to her daughter Jena Rush. Linda McGuire told Terry that she will “likely have to get [the jewelry] back” from Jena Rush.
55. A registration “renewal/transfer” of an Everglades boat referenced a renewal
56. The Debtors’ initial Schedules and their testimony at the Section 341 meeting did not disclose ownership of an all-terrain vehicle (“ATV“). In subsequent testimony, David stated that a Polaris ATV had been assigned to NOG for no consideration to be used on one of NOG‘s oil and gas leases.
IV. Discussion
A. Issues to Be Tried3
Based on both the Court‘s Summary Judgment Order, which denied David a discharge and narrowed the issues to be tried against Terry, and the Final Pre-Trial Order [Doc. 228], the claims in SEPH‘s Second Amended Complaint [Doc. 76] tried against Terry were:
1. Count I. Whether Terry Stewart had fraudulent intent under
2. Count III. Whether Terry Stewart made a false oath within the meaning of
3. Count IV. Whether Terry Stewart has come forward with a satisfactory explanation within the meaning of
B. Standards for Denying Discharge
A “central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.‘” Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659 (1991). As the mantra of bankruptcy goes, a discharge of indebtedness in bankruptcy is reserved for the “honest but unfortunate debtor.” Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699 (1934). In order to effectuate this “fresh start” policy of bankruptcy relief, exceptions to discharge are narrowly construed with all doubts resolved in the Defendant‘s favor. It is a well-established rule that exceptions to discharge are to be construed strictly against a creditor and liberally in favor of the debtor. Kawaauhua v. Geiger (In re Geiger), 523 U.S. 57, 62, 118 S.Ct. 974, 799 (1998); Bellco First Federal Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir. 1997); Miller v. Gentry (In re Miller), 55 F.3d 1487, 1489 (10th Cir. 1995), cert. denied, 516 U.S. 916 (1995); Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir. 1997) (acknowledging generally “that the Bankruptcy Code must be construed liberally in favor of the debtor and strictly against the creditor.“).
Despite the policy of the “fresh start,” “to be entitled to discharge, the debtor must deal fairly with creditors and with the court.” Wieland v. Gordon (In re Gordon), 526 B.R. 376, 387 (10th Cir. BAP 2015). “The bankruptcy system is set up to protect ‘honest but unfortunate debtors,’ not those who would abuse it to further their own interests.” Id. at 397. “A discharge in bankruptcy is a privilege, not a right, and should only inure to the benefit of the honest debtor.“(citation modified), Wieland v. Gordon (In re Gordon), 509 B.R. 359, 370 (Bankr. N.D. Okla. 2014) (quoting In re Juzwiak, 89 F.3d. 424, 427 (7th Cir. 1996)).
The burden of proof for establishing an exception to discharge is a preponderance of the evidence. Grogan, 498 U.S. at 287-88. In order to obtain a denial of a discharge, plaintiff “must prove each statutory element by a preponderance of the evidence.” Gordon, 509 B.R. at 370. Once a plaintiff “establishes a prima facie case for denying Defendant‘s discharge under
§ 727(a)(2) 5
SEPH asserts that Terry should be denied a discharge as result of the alleged fraudulent transfer of assets in an attempt to hinder, delay, and defraud their creditors pursuant to
Section 727(a)(2)(A) of the Bankruptcy Code, provides:
(a) The court shall grant the debtor a discharge, unless –
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred ... or concealed, or has permitted to be transferred ... or concealed –
(A) property of the debtor, within one year before the date of the filing of the petition ....
Under this section, a debtor is not entitled to receive a discharge if the debtor: (1) transfers or conceals; (2) property of the estate; (3) within one year of the petition date; (4) “with the intent to hinder, delay, or defraud a creditor.” Brown, 108 F.3d at 1293. To deny Terry a discharge under
With regard to the Oklamiss Transfer, Terry‘s conduct met three of the four elements necessary to bar a discharge under
(1) a lack or inadequacy of consideration;
(3) the retention of possession, benefit or use of the property in question;
(4) the financial condition of the party sought to be charged both before and after the transaction in question;
(5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors;
(6) the general chronology of events and transactions under inquiry;
(7) whether the transfer was disclosed or concealed;
(8) whether the debtor made the transfer before or after being threatened with suit by creditors (a variant of factor (5));
(9) whether the transfer involved substantially all of the debtor‘s assets;
(10) whether the debtor absconded; and
(11) whether the debtor was or became solvent at the time of the transfer.
In re Wreyford, 505 B.R. 47, 58-59 (Bankr. D. N.M. 2014) (citing In re Soza, 542 F.3d 1060, 1067 (5th Cir. 2008)); Annino, Draper & Moore, P.C. v. Lang (In re Lang), 246 B.R. 463, 469 (Bankr. D. Mass. 2000); Frierdich v. Mottaz, 294 F.3d 864, 870 (7th Cir. 2002). “Whatever badges of fraud a court uses, no particular badge is necessary, nor is any combination sufficient. The matter is always factual....” 5 Collier on Bankruptcy, ¶ 548.04[1][b][ii] (Henry Sommer & Alan Resnick (16th Ed. 2012)).
Applying these “badges of fraud,” together with all other evidence in the case, the
There was some evidence that could weigh in favor of denying Terry a discharge under
On the other hand, she testified that she did not recall the reason she signed the two Oklamiss documents other than being asked to do so by David who was the sole manager of Oklamiss.10 Terry testified that she did not participate in or have any knowledge of any of David‘s oil and gas business operations, including those of Oklamiss or Raven Resources, until 2015, after the filing of this involuntary bankruptcy. While she was paid a salary prior to 2014 or 2015, she did not perform any tasks within the business other than being a “go-fer” when “someone from the office would call and ask me to go get something.” Even after the bankruptcy, the only thing Terry did with regard to the business was to go to the office a few days a week and enter billing information on the computer. Of the hundreds of emails which were evidence in this case involving Stewart affiliates Oklamiss, Raven Resources, Neverve LLC or NOG, LLC, including the BP Claims, not one was sent to, sent by, or even copied to Terry.
As stated in its Summary Judgment Order, the Court‘s ability to listen to David‘s testimony, observe his demeanor and assess his credibility over five full days of testimony
SEPH asserts that even if Terry‘s execution of the two Oklamiss documents was not done with actual fraudulent intent it evidenced such a reckless indifference to the truth or condoning of her husband‘s conduct so as to meet the fraudulent intent requirement under
SEPH presented as an expert witness David Payne (“Payne“), the head of a certified public accounting firm that provides restructuring and insolvency advisory services, appraisal services, and forensic accounting services. No doubt Payne is a qualified expert in those fields and has on previous occasions so testified before this Court. His testimony, however, added little to assist the Court in evaluating Terry‘s potentially non-dischargeable conduct. He testified as to the so-called “badges of fraud” which are traditionally applied to determine fraudulent conduct of barring a discharge under
Unlike the Oklamiss Transfer, there was no evidence presented at trial, nor in the lengthy stipulated facts above, that Terry had any involvement with the transfers of property associated with either the creation of the Red Britt Trust or the NOG Transfer.11 Terry‘s testimony that she had never read, or even seen, the Red Britt Trust and didn‘t know that she was a contingent beneficiary under it was unrefuted – “I knew I had something to do with it, but I didn‘t know exactly what that was.”
D. False Oath Under § 727(a)(4)(A) .
Under Count III of its Second Amended Complaint, SEPH asserted that Debtors (for purpose of this trial, Terry) knowingly and fraudulently made false oaths or account in disclosing assets and transactions in her Schedules, Amended Schedules, Statement of Financial Affairs and Amended Statement of Financial Affairs (“SOFA“) so as to deny her a discharge under
Notwithstanding the presumption in favor of a “fresh start,” a debtor who seeks the protection afforded under the Bankruptcy Code has a duty to fully disclose the nature of his assets and financial affairs when completing his statements and schedules. Butler, 377 B.R. at 914-15
(“In exchange for that ‘fresh start,’ the Code requires debtors to accurately and truthfully present themselves before the court.“); Wieland v. Gordon (In re Gordon), 526 B.R. 376, 387 (10th Cir. BAP 2015) (“[T]o be entitled to discharge, the debtor must deal fairly with creditors and with the Court.“); The Cadle Co. v. King (In re King), 272 B.R. 281, 300 (Bankr. N.D. Okla. 2002) (“The bankruptcy schedules and statement of affairs do not ask the debtor to make an assessment of what he thinks are important assets or debts. Debtor[s] must, under oath, list all creditors and assets, as well as all transfers of property within the prior year.“(emphasis in the original).A debtor‘s discharge may be denied if the debtor knowingly and fraudulently, in connection with the case, makes a false oath.
“The existence of false or inaccurate statements is not, in and of itself, sufficient cause to deny a debtor‘s discharge unless it is shown that these were knowingly and fraudulently made.” Robin Singh Educational Services, Inc. v. McCarthy (In re McCarthy), 488 B.R. 814, 826 (1st Cir. BAP 2013). “To prevail on a claim for denial of discharge under
The burden of proof rests with the party opposing discharge, but “once it reasonably appears that the oath is false, the burden falls upon the bankrupt to come forward with evidence that he has not committed the offense charged.” Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987). The Debtor will not be denied a discharge if a false statement is due to mere mistake or inadvertence. Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1294 (10th Cir. 1997) (citing In re Butler, 38 B.R. 884, 889 (Bankr. D. Kan. 1984)).
Moreover, an honest error or mere inaccuracy is not a proper basis for denial of discharge. Id. at 1295; In re Magnuson, 113 B.R. 555, 558-59 (Bankr. D. N.D. 1989). “However, ‘reckless indifference to the truth...has consistently been treated as the functional equivalent of fraud for purposes of
The “mistake” or “I didn‘t think it was important” defenses have their limits. “A debtor has an uncompromising duty to disclose whatever ownership interests are held in property,” and “[i]t is not for the debtor to pick and choose or obfuscate the answers.” Fokkena v. Tripp, (In re Tripp), 224 B.R. 95, 98 (Bankr. N.D. Iowa 1998) (emphasis in the original); Matter of Yonikus, 974 F.2d 901, 904 (7th Cir. 1992) (“Debtors have an absolute duty to report whatever interest they hold in property, even if they believe the assets are worthless or are unavailable to the bankruptcy estate.“); Morrel, West & Saffa, Inc. v. Riley (In re Riley), 128 B.R. 567, 569 (Bankr. N.D. Okla. 1991) (“The Debtor cannot omit information required of him simply because he believes or decides the property omitted has no value or the information is not necessary. This is for the creditors and the Court to decide.“). Moreover, that duty of disclosure continues beyond the initial filings in the case so that “[f]ailure to amend schedules after becoming aware of their inaccuracies is
1. The Jewelry
Most, though not all, of SEPH‘s
Terry testified that she believed that the $7,012 valuation of the jewelry in the Amended Schedules was the price at which she could sell the jewelry to Kannard who had valued it. It was her understanding that David had been advised to obtain “the value that Kannard gave us as if they bought the jewelry today - is not the same value, I‘m assuming, that we purchased them for, but I don‘t know what David paid for any of this.” As the Court views it, the determination of whether Terry possessed the requisite fraudulent intent rests upon whether she justifiably relied on the Kannard valuations when she signed the
SEPH introduced the testimony and an appraisal of the jewelry by an expert, J. Miles Dowd. By an appraisal conducted on June 24, 2021, almost six years after the filing of Terry‘s Amended Schedules, Dowd placed a fair market value of $130,246 for some twenty-seven (27) items of jewelry of both David and Terry (the “Dowd Report“).14 In his trial
Both of Terry‘s pre-trial and post-trial Motions in Limine sought to exclude the Dowd Report on the basis, inter alia, that the appraisal was made too far removed in time from the Petition Date to be admissible. The Court denied both motions on essentially the same basis, finding that the time differential between the filing of bankruptcy and the date of the appraisal of the jewelry went to the weight to be accorded the testimony and Report, not its admissibility. [Docs. 201 and 258].
Ironically, in this case in which SEPH sought to bar Terry‘s discharge on the basis of filing false schedules, SEPH‘s jewelry expert, Dowd, admitted in his testimony that in September 2013 in his personal bankruptcy he had agreed to waive his discharge after the United States Trustee had filed an adversary Complaint for Dowd having filed false schedules. [In re James Miles Dowd et. al, Case No. 13-30852-BJH, (Bankr. N. D. Texas)]. He also admitted having plead guilty in 2016 to bankruptcy fraud in violation of
The admission of prior convictions involving dishonesty and false statement is not within the discretion of the court. Such convictions are peculiarly probative of credibility and, under this rule, are always to be admitted. Thus, judicial discretion granted with respect to the admissibility of other prior convictions is not applicable to those involving dishonesty or false statement.
Furthermore, the “10-year rule” under
deposition Dowd adjusted that valuation downward as of the date of the bankruptcy in 2015 to be $89,250. SEPH asserts that the difference in value between the Kannard valuations and the purchase price as well as the huge difference between the scheduled values and the Dowd Report are proof that the Schedules carry the requisite fraudulent intent. The Court disagrees. If this were solely a question as to whether the Dowd Report or the Debtors’ Schedules most accurately represented the value of the jewelry in 2015 the Court might well find in favor of the Dowd Report; however, the issue before the Court is not whose valuation is more accurate. The Court need not make a determination of the jewelry‘s value in order to adjudicate SEPH‘s
On similar facts, the bankruptcy court in Harker v. West (In re West), 328 B.R. 736 (Bankr. S.D. Ohio 2004), rejected similar arguments made by a Chapter 7 trustee in a
While the case law is sparse on the subject, the majority, and better-reasoned, line of authority holds that personal property should be listed in the debtor‘s schedules at fair-market, rather than liquidation, or distressed-sale, value. But while [the debtor] may have been advised by her bankruptcy counsel to utilize a valuation standard that has not gained acceptance, the Court is not persuaded that she acted in bad faith by relying on his instruction to list her jewelry at its pawnshop, or liquidation, value.
Id. at 750-5. See also, In re Valentine, 2009 WL 3336081, at *7 (Bankr. D. N.H. 2009) (the Court finding “the Debtor‘s testimony credible and that she did not act in bad faith by relying on her counsel‘s advice to schedule her jewelry only using a liquidation value rather than fair market value. The question here is not which valuation method is correct but whether the debtor had any reasonable basis for choosing the one that she did.“).
Although a large majority of courts have concluded the property should be listed in a debtor‘s schedules at its fair market value, there is at least limited support that the liquidation-value approach Terry understood from David, via advice from counsel, was appropriate. See West, 328 B.R. at 750 n.8 (citing cases and explaining majority and minority approaches). Terry could not reasonably have been expected to know that she was required to use fair market value, rather than liquidation value, in completing her schedules with respect to the jewelry where the advice had some limited support and it was
In addition to the valuation issues with regard to the jewelry, there was also the issue of the omission from the Schedules of a few pieces of jewelry, including an 18 carat white gold and diamond bridal ring, which SEPH‘s expert valued at $40,351, which Terry testified she had given to her daughter, Jena, as a wedding present in 2012; an 18 karat white gold and diamond necklace by Roberto Coin, which SEPH‘s expert appraised at $11,349, and gifted to Jena; a 14 karat yellow gold and diamond “straight-line” (tennis) bracelet gifted to Jena that SEPH‘s expert valued at $7,909; and a pair of 18 karat white gold, Tanzanite and diamond earrings valued at $5,612, which she had gifted to her daughter-in-law. All of these items were furnished to SEPH‘s expert for appraisal but not included in the Amended Schedules or Kannard‘s valuation.
Terry testified both in her 2004 and at trial that these items of jewelry were not included in the Schedules nor in the Kannard valuation because they had been gifted away prior to bankruptcy and were no longer her property. She was not in possession of those items at the time of the filing of the involuntary bankruptcy, but was later advised by Raven Resources in-house counsel, and later by bankruptcy counsel, Ruston Welch, to have those items returned to her, presumably in anticipation of a bankruptcy court challenge to
Bankruptcy schedules do not require the disclosure of the transfer or gifts of assets to family members made more than one year prior to the bankruptcy filing. Under the circumstances, the Court finds that exclusion of such jewelry from both the Kannard valuations and the Schedules was not indicative of fraudulent intent.
SEPH asserts that the original Schedules and Terry‘s testimony at the 341 examination were so incomplete as related to the jewelry so as to constitute the necessary
The diamond ring which Terry testified that she had given her daughter as a wedding present in 2012 appeared on the Debtors’ homeowners insurance policy endorsement as having a value of $36,600. Terry testified that she had no knowledge of obtaining the insurance policy and why the ring was included; however, the policy period was from August 17, 2015, to August 10, 2016, after possession of the ring was recovered by Terry from her daughter upon advice of counsel.
This bankruptcy case was (and is) unique. It was filed on September 30, 2014, as two separate involuntary cases by SEPH in the Bankruptcy Court for the Southern District of Alabama. The Debtors were represented by Alabama attorneys. On April 3, 2015, Debtors filed their Motion to Transfer Venue seeking removal of the case to the Bankruptcy Court for the Western District of Oklahoma. While the Motion to Transfer Venue was pending, Debtors obtained orders from the court extending the date within which they were required to file Schedules or Provide Required Information by April 30, 2015. One day late, on May 1, 2015, Terry, through her Alabama counsel (who had already successfully sought to transfer the case to Oklahoma) filed her original Schedules. As Terry testified at trial, with Alabama counsel, “everything was rushed (and) we were in a really big hurry to evaluate everything... (but) when the case was moved to Oklahoma, Rusty Welch took it and he was much more tedious and detailed to the point where he came to the home and took pictures of everything.” The preparation of the Schedules by Alabama counsel and by Mr. Welch was the difference “between night and day.” After Terry testified at the 341 examination, Oklahoma counsel Welch reviewed and discussed the Schedules, identified corrections that needed to be made and discussed with the Trustee needed amendments. The evidence is that the Debtors provided the Trustee with not only pictures of the jewelry but pictures of the rooms and contents of the house. The Trustee later testified that he
For the foregoing reasons, the Court concludes that SEPH‘s objection to the discharge of Terry pursuant to
E. Unexplained Decrease in Assets -- § 727(a)(5) Claim.
Count IV of SEPH‘s Second Amended Complaint seeks to bar Terry‘s discharge under the provisions of
After the objecting party demonstrates a disappearance of assets,
Courts have generally determined that what constitutes a satisfactory explanation under
In the present case the undisputed facts indicated that in the years leading up to bankruptcy the Debtors suffered massive amounts of unexplained loss of asset values: in a May 31, 2010 personal financial statement, the Debtors reported a net worth of
Other than acknowledging that the interest in Oklamiss and Raven Resources were the Debtors’ most valuable asset, Terry had no knowledge of, and thus was unable to explain, the reasons for the Debtors’ loss of asset value. In the Court‘s opinion, Terry‘s testimony that she had no knowledge of or managerial involvement with her husband‘s oil and gas activities was credible. The rationale for
Where a creditor has objected to the discharge of joint debtors for failure to explain loss of assets, courts have refused to deny a discharge to the spouse who did not own, control, and/or dissipate the assets. See Prairie Production Credit Association v. Suttles (In re Suttles), 819 F.2d 764, 766 (7th Cir. 1987) (affirming bankruptcy court‘s determination that debtor-husband‘s discharge would be denied but that debtor wife‘s failure to explain loss of assets resulted from honest mistake and her discharge would not be denied);
There is scant evidence that Terry knew and was thus able to explain what happened to the loss in value of the Stewart affiliates. A considerable amount of SEPH‘s trial examination of Terry dealt with her and David‘s tax returns and financial statements.18 Other than having signed the tax returns and a few of the financial statements which were prepared by David and his accountant, Terry testified that she had not read or had input or knowledge of the content of those documents. Simply put, Terry was in no manner engaged in the operation of David‘s oil and gas ventures and financial transactions. Not to be pejorative in any manner – the Court believes Terry‘s self-described role in the
V. Conclusion
Recognizing the general rules that the right to a discharge is left to the sound discretion of the bankruptcy court; that exceptions to discharge are narrowly construed in furtherance of the Bankruptcy Code‘s “fresh start” policy; that a total bar to discharge is an extreme step; and that
IT IS ORDERED that SEPH‘s request that the Chapter 7 discharge of Terry P. Stewart be denied, will be DENIED. Any scheduled debt owed by Terry P. Stewart is therefore extinguished, including any personal liability that she may have as a result of any judgment rendered in favor of Southeast Property Holdings, LLC.
Pursuant to
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